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CO2 prices see biggest weekly drop for 5 months

CO2

01 Feb 2019 12:33

Image: Shutterstock.com

Image: Shutterstock.com

London

01 Feb 2019 12:33

(Montel) EUA prices suffered their largest weekly drop since September as buying interest remained modest amid worsening fundamentals.

The benchmark Dec 19 EUA contract last traded down 2.8% at EUR 21.68/t on Ice Futures. The contract was 9% down from last Friday’s close.

“It's a lagged effect of the coal commission report and coal to gas switching,” one London-based trader told Montel. 

Earlier in the week Germany’s coal commission published its recommendations for a phase-out of coal-fired power by 2038, including proposals that Germany should cancel EUAs to compensate for the lost demand.

Analysts differed on the likely impact of the proposals, since there was little clarity yet on the size or timing of EUA cancellations.

Germany opened its 2019 auction programme this morning, selling 3.2m EUAs at EUR 21.38/t, a discount of around EUR 0.16 to the prevailing spot market.

Weak result
“[The weak auction result] definitely shows low compliance demand,” said Yan Qin of Refinitiv. “Last year, EEX’s German auctions were mostly bought by compliance buyers.”

A number of participants said they expected compliance demand for 2018 to be low key in the coming weeks, as many industrials would have already purchased allowances when prices were below EUR 20/t last year.

However, others expected compliance buyers to enter the market in the coming weeks.

“There are still plenty of installations that buy just once a year,” said Tom Lord of Redshaw Advisors. “Some buyers did some advance buying last year but many others still sat and waited.”

In addition, persistently low natural gas prices were keeping gas-fired power competitive against coal-fired generation and this too was undermining demand, sources said.

“Signals from surrounding markets are not good,” Qin said. “TTF gas is still below EUR 20, and the 2022 and 2023 fuel-switching price [of carbon] is below EUR 20.” 

Technical indicators were also worsening, sources said. 

“The 100-day moving average has been decreasing for the past two days, the first [time it’s fallen] since July 2017,” said Sandrine Ferrand of France’s Engie.

“The relative strength index is not yet showing an oversold market”, while the moving average convergence-divergence index showed downward momentum may be picking up, she added.

“Flat to bearish”
The outlook for the coming week was seen as flat to bearish, said market participants, with weather forecasts indicating milder weather to the end of February after a cold start to the month.

“Slowly the trend is weakening,” said Ferrand. “If there is no strong cold wave this winter, and if Q1 GDP figures worsen, that might trigger further profit-taking.”

Utilities hold the key to the price direction, Redshaw’s Lord said.

“If they were buying now, then we would be seeing prices stabilise or even rise slightly,” he said.

“But carbon may need to fall further in order to incentivise utilities to buy again. It’s a moving target though, as it also relies on gas, coal and power prices.”

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